Federal Change in Medi-Cal Funding Will Affect Health Care Premiums for All

When is a tax not really a tax? When the government gives the taxpayer more money in return than the taxes originally paid.

That scenario has been part of the funding scheme for medical care programs for low-income recipients that the federal government has approved for California and other states for the last decade.

Last summer, not surprisingly, the federal government called a halt to the practice by which Medi-Cal health plans were taxed and received Medi-Cal reimbursements in excess of the taxes paid in.

New Policy

The federal government now says that in order for any state to continue receiving matching federal funds for what the state spends, the tax on Medi-Cal health plans has to be broadened to health plans that have few if any Medi-Cal clients.

The new levy becomes truly a tax because the money collected will be used by the state to draw federal matching monies that will be spent on programs that do not in turn directly benefit the taxpayers.

Ultimately, the health plans will pass on that cost to the health premium purchasers—businesses and their employees—in order to fund some of the Medi-Cal obligations incurred by the state.

The purchasers—employers and employees—will not get a benefit in return, and will see higher health care costs as a result.

Medi-Cal Funding Gap

Meanwhile, Medi-Cal spending is slated to grow significantly between now and 2020. The federal Affordable Care Act required states to adopt looser eligibility rules for their Medicaid programs (Medi-Cal in California), generally referred to as the “mandatory expansion,” and also allowed states to expand eligibility voluntarily to individuals living below 138% of the federal poverty level.

The mandatory expansion increased Medi-Cal enrollment by 1.1 million and will cost California approximately $1.1 billion in 2015–16. The voluntary expansion has increased enrollment in the program by an additional 2 million, but so far has cost the state nothing because the federal government agreed to pay 100% of the cost for all newly eligible enrollees through 2016.

Starting in 2017, however, the federal share of costs associated with these individuals will drop to 95%, and in 2020 it will drop to 90%, where it is expected to stay.

The Governor’s May budget revision this year projected that by 2018–19, California’s share of the cost associated with the voluntary expansion will be $1 billion. Presumably that share will grow to more than $2 billion once the federal contribution drops down to 90% in 2020.

This means that, even without taking inflation into account, and without additional increases to Medi-Cal enrollment numbers or to reimbursement rates for Medi-Cal providers and hospitals, the state will need to come up with an additional $2 billion annually, or make equivalent cuts to state programs.

All of this is on top of the $1.1 billion the state would need to raise or cut to address the loss of the current tax.

Inappropriate Tax

As policymakers weigh the options for fixing the gap in the Medi-Cal budget, they should revisit the wisdom of targeting a new tax on managed care organizations that do not serve Medi-Cal clients.

This new tax is unfair to and burdensome on responsible employers and their employees who purchase health care. It sets a dangerous precedent that could lead to a disconnect of general fund support from Medi-Cal and to long-term pressure to increase the tax to fund future funding gaps.